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Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
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January 25, 2006
TO: CLOSED-END INVESTMENT COMPANY MEMBERS No. 4-06
EQUITY MARKETS ADVISORY COMMITTEE No. 4-06
INVESTMENT ADVISER MEMBERS No. 6-06
COMPLIANCE MEMBERS No. 7-06
SEC RULES MEMBERS No. 11-06
SMALL FUNDS MEMBERS No. 9-06
RE: NASD PROPOSAL RELATING TO GIFTS AND BUSINESS ENTERTAINMENT
The NASD has issued a Notice to Members requesting comment on proposed
Interpretive Material (“IM”) to NASD Rule 3060 addressing gifts and business entertainment.1
The proposed IM outlines the policies and procedures an NASD member must adopt in
connection with its business entertainment practices with employees of a customer. It would
supersede prior NASD staff guidance in this area.
Rule 3060 prohibits any NASD member or person associated with a member, directly or
indirectly, from giving anything of value in excess of $100 per year to any person where such
payment is in relation to the business of the recipient’s employer. In 1999, the NASD issued a
staff letter clarifying that Rule 3060 does not prohibit “ordinary and usual business
entertainment” provided that such entertainment is “neither so frequent nor so extensive as to
raise any question of propriety.”
The proposed IM provides guidance concerning the written policies and procedures that
NASD members must adopt surrounding their business entertainment practices. Most
significantly, an NASD member must determine and define the forms of business entertainment
that are appropriate and inappropriate, including appropriate venues, nature, frequency, types
and class of accommodation and transportation, and either firm dollar limits or thresholds
requiring advance written approval. The proposed IM does not impose specific limits, nor does
it require that all NASD members adopt the same limits or treat all recipients equally. At the
same time, however, the Notice states that a member’s policies and procedures must not be so
unbounded or vague that no reasonable determination of propriety can be discerned. In
addition, the proposed IM expressly would allow members to set different standards for
1 NASD Notice to Members 06-06 (January 2006) (“Notice”). The Notice can be found on the NASD’s website at
http://www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_015876.pdf. Comments
on the proposal are due to the NASD no later than February 23, 2006.
2
business entertainment in connection with events that are educational, charitable or
philanthropic in nature.
The proposed IM also would require that an NASD member’s policies and procedures
preclude providing business entertainment that is so lavish or extensive in nature that an
employee would likely feel compelled to act in a manner inconsistent with the interests of his or
her employer (e.g., directing order flow without due regard to best execution or other
transaction pricing considerations). In addition, NASD members must maintain detailed
records of business entertainment expenses and make such information available to the
customer in respect of its employees upon written request. Finally, written policies and
procedures must provide for effective supervision and compliance with a member’s business
entertainment policies.
The proposed IM defines the terms “customer” and “business entertainment” for
purposes of the IM. According to the Notice, the definition of “customer” recognizes the
proposed distinction between business entertainment provided directly to natural person
customers (which is not covered by Rule 3060) and business entertainment provided to
employees, agents or representatives of a customer (which is covered by Rule 3060).2 The
definition of “business entertainment” codifies NASD’s position that a member must
accompany or participate in an event for it to be deemed business entertainment.3
Ari Burstein
Associate Counsel
2 “Customer” would be defined as a “person that maintains or whose employee receives business entertainment for
the purpose of having such person prospectively maintain, an account with a member or is otherwise a customer of
the member for the purpose of investment banking or securities business, and has an employee, agent or
representative act on behalf of the account in some capacity in respect of such account or customer relationship with
the member.”
3 “Business entertainment” would be defined as entertainment “in the form of any social event, hospitality event,
charitable event, sporting event, entertainment event, meal, leisure activity or event of like nature or purpose, as well
as any transportation and/or lodging accompanying or related to such activity or event, including such business
entertainment offered in connection with an educational event or business conference, in which a person associated
with a member accompanies and participates with such employee irrespective of whether any business is conducted
during, or is considered attendant to, such event.”